Netflix earnings: New subscribers are still the most important thing for investors

Analysts agree with CEO Reed Hastings that the second quarter is typically a weak one for subscriber additions

Bloomberg News/Landov

By

TreyWilliams

Reporter

When it comes to Netflix Inc., investors have traditionally set their sights on the ebb and flow of the company’s subscriber numbers.

Subscribers are, after all, the streaming giant’s main source of revenue. Everything Netflix
NFLX, +0.46%
does is to serve that subscriber base and attract new subscribers.

But the second quarter is a historically weak one for Netflix subscriber additions. Last year Netflix shares were pummeled immediately after the company’s second-quarter release, in which it reported adding 1.7 million subscribers, below Wall Street expectations of 2.5 million net adds.

While that quarter’s subscriber numbers were impacted by users ditching the service following price increases, Chief Executive Reed Hastings noted during the company’s quarterly earnings call that the second quarter is, “generally a seasonally tight quarter for us.”

UBS analyst Doug Mitchelson, who has a buy rating on Netflix with a $175 12-month price target, said that despite management protests, subscriber additions are still the most important metric. And he noted that seasonal churn should be a small headwind.

“The Street and UBS has held relatively tight to guidance this quarter,” Mitchelson wrote of subscriber estimates. He expects 2.6 million subscriber adds in the second quarter, “due to a very strong original content slate and easy churn comparisons.

“We expect Netflix’s original content ramp to continue to drive accelerating international net additions, especially as Netflix increases investment in local content overseas and expands genres such as movies and non-fiction.”

Netflix has shown it is willing to spend whatever it takes to give viewers what they want, and even what they don’t yet know they want.

As Netflix’s subscriber numbers have increased, so have its overall content spending obligations, which include amounts related to content acquisition and licensing and other agreements. The company had 98 million subscribers at the end of the first quarter, up from 46 million at the end of the first quarter of 2014.

In the same time frame, its total streaming content obligations have increased to $15.29 billion from $8.86 billion, according to regulatory filings.

However, Netflix seems to be getting smarter about the amount of cash it shells out per show versus the number of viewers a show actually attracts. Over the course of May and June, Netflix canceled three of its original series — after canceling just five since 2012.

The company axed “The Get Down,” “Sense8” and “Girlboss.” MarketWatch has reported “The Get Down” was one of TV’s most expensive shows, costing Netflix $120 million, or about $11 million per episode. And reports have pinned “Sense8” at about $9 million an episode.

Netflix keeps viewership on its platform close to the vest, but none of the three canceled shows appear to have garnered the same level of engagement as Netflix hits, such as “Stranger Things,” “House of Cards,” “Orange is the New Black” and even “Master of None,” shows that the company often praises.

Netflix will report its earnings for the second quarter after the market closes on Monday. Here’s what investors can expect:

Earnings: Netflix is expected to report earnings of 16 cents per share, according to analysts surveyed by FactSet. That would be a nearly 78% increase compared with the same quarter a year ago, but a 60% decline from the most recent first quarter. Netflix has beaten FactSet’s profit estimate in eight of the last 10 quarters.

Revenue: Revenue for the quarter is expected to hit $2.76 billion, according to analysts tracked by FactSet. That would be up more than 31% compared with the year-earlier period, and nearly 5% from the most recent quarter. Netflix’s forecast revenue breaks down into $1.51 billion from domestic streaming, $1.15 billion from international streaming and $115 million from domestic DVD subscriptions. Netflix has missed revenue expectations in six of the last 10 quarters.

Estimize expects revenue to hit $2.77 billion in the quarter.

Share price: Analysts covering the stock have an average 12-month price target of $159.36, which represents a more than 3% premium to Tuesday’s closing price. The analysts, on average, rate Netflix as overweight, which is the equivalent to a buy rating.

Shares of Netflix are up nearly 31% in the year to date. By comparison, the S&P 500 index
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is up 10% in the year to date, while the Dow Jones Industrial Average
DJIA, -0.05%
is up more than 9% in the year, and the tech-heavy Nasdaq Composite Index
COMP, +0.15%
is up more than 17% in the year.

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